Before entering into any large business transaction, such as a merger, an acquisition, or
A client in Sunnyvale, California had recently signed a letter of intent concerning a merger and was seeking input on the tasks necessary to close the deal. He was most curious about a memo he had received from the buyer asking him to provide a large number of agreements and other documents concerning his business. I started our conversation by welcoming him to due diligence land.
Due diligence is a term used to describe any investigation prior to entering into a substantial transaction. In an acquisition context, it refers to the investigation of the seller by the buyer. It is a critical part of any acquisition transaction.
As I mentioned in a prior blog, any company hoping to sell itself must organize, preferably with the assistance of counsel, all of its key agreements and documents. Counsel should also review the company’s minute book to make sure it is up to date and complete. Nothing will increase a seller’s perceived
It is increasingly common for all diligence materials to be loaded into a web-accessible, password protected, “war room”. The materials are accessed online by those persons involved in the transaction. A third party service is hired to perform the heavy lifting of scanning the documents, creating the appropriate indexes, and maintaining the site.
One threshold matter that should be considered is when the materials should be made available. Typically, selected information is provided under nondisclosure as part of the negotiations leading to the letter of intent. Once the letter of intent is signed, however, the buyer will want to begin its in-depth diligence.
There are a number of organizational issues that are required at this stage for the seller. First, a very small number of people should be identified who can assist with the acquisition. It is very important that these people have access to information which will be required. If the acquisition was not otherwise disclosed, these people will also need to keep the acquisition confidential from other employees. Second, face to face meetings between the buyer and seller deal teams should occur offsite to minimize any risk of disclosure.
One difficult issue can arise where agreements are being requested to be disclosed, but the agreements themselves are subject to confidentiality obligations. These type of agreements need to be reviewed to determine if there is any basis for the disclosure to be allowed. If there is no express exception allowing disclosure in a diligence context, or no other basis exists for excusing the confidentiality obligation, the disclosure should not be made absent approval by the other party. Admittedly, parties often disclose such documents in connection with a diligence investigation notwithstanding the nondisclosure obligation, taking comfort from the fact that the buyer is subject to a nondisclosure obligation. Care should be taken, however, if the agreement to be disclosed is with a key supplier or customer, particularly if the agreement requires the consent of the other party to stay in force as a result of the acquisition.
A buyer’s diligence investigation is one of the most important tasks involving an acquisition. Investing early on in a smooth investigation will help lay the groundwork for an efficient transaction process.